1

How Fiat Relies on Chrysler for Profits

The Jeep Grand Cherokee is a tremendously profitable product for Chrysler -- and Chrysler's profits are a big part of why its merger with Fiat is working. Photo credit: Chrysler.

There are a lot of good reasons Fiat (NASDAQOTH: FIATY) chose to merge with Chrysler. Fiat is good at small cars and luxury models, Chrysler is good at trucks and SUVs and big sedans. Fiat's traditional strongholds are Europe and South America, while Chrysler is a major player in North America.

What's more, the two companies seem to have compatible cultures. They've been forging closer ties ever since Fiat took control of Chrysler following its 2009 bankruptcy, and the fruits of the collaboration -- a much-improved lineup of vehicles for Chrysler -- have been impressive.

But there's more to the story than that, of course. With Fiat's help, Chrysler has been profitable -- while Fiat itself has struggled in a tough European market. As Fool contributor John Rosevear explains in this video, the Fiat side of the house will be looking to Chrysler to pay the bills for a while longer. A transcript follows the video.

Special free report: The secrets to saving big on your next new car or truckYou don't know it yet, but you probably spent thousands more than you should have on your vehicle. In fact, the auto industry can be such a dangerous place for consumers that our top auto experts are determined to even the playing field. That's why they created a a brand-new free report on The Car Buying Secrets You Must Know. The advice inside could save you thousands of dollars on your next car, so be sure to read this report while it lasts. Your conscience, and your wallet, will thank you. Click here now for instant access.

Hey, Fools, it's John Rosevear. So last week Fiat reported 2013 earnings of 943 million euros, or about $1.3 billion, not including one-time items. Or actually, we should say Fiat Chrysler Automobiles reported that profit. Fiat and Chrysler have completed their merger, and the combined company will now be known as Fiat Chrysler Automobiles, or FCA.

And make no mistake -- the Chrysler part is pretty important. Without Chrysler, Fiat would have lost 911 million euros last year, over a billion dollars. But the new company also cut its guidance for 2014. They're now saying that FCA's trading profit -- that's their term for earnings before interest and taxes and one-time items; what we might call operating profit -- FCA's trading profit in 2014 will be between 3.6 billion and 4 billion euros. That's down from the goal that Fiat set for this year back in 2012, which was 4.7 to 5.2 billion euros, but it would still be a big boost over what they did in 2013.

And they're going to be looking again to Chrysler for that boost. CEO Sergio Marchionne expects the all-new Chrysler 200 sedan to give the Chrysler side of the house a boost, mostly here in the U.S. And they also expect a full-year boost from the Jeep Cherokee. The Cherokee was originally supposed to be out early last year, but it was delayed for months because of a software issue. The Cherokee finally started shipping in October, and sales have been pretty strong.

All total, FCA expects to ship 2.8 million Chrysler vehicles in 2014, they said, up from 2.56 million last year. But meanwhile, auto sales in Europe continue to be way down from historical norms, and competition is fierce, which has put Fiat at a price disadvantage on its traditional home turf. And Fiat's traditional strongholds are in southern Europe -- Italy, of course, but also places like Spain, and those regions have been hit harder economically than the U.K. or Germany, where Ford and VW, respectively rule the roosts.

FCA plans to present a new three-year business plan to analysts and media in May. It's widely expected that their strategy for Europe -- and for expansion in China -- will revolve around upscale models. We've already seen some hints of that with the recent investment in Maserati, and I expect that some new models for Alfa Romeo will follow, and Alfa plus Maserati will be presented as a complete luxury model line that will be positioned against BMW and Mercedes and so forth, in Europe and in China and also in the U.S. We know Alfa Romeo is headed back to the U.S. soon, and we're already seeing the Maseratis; they even had a Super Bowl ad.

So lots of work ahead for this new combined automaker, but some promising progress, too. Thanks for watching, and Fool on.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Well... It's done. Marchionne is a very tough businessman and negotiator. The last piece of Chrysler cost him a few billion and part of that was paid out of Chrysler cash. The first 30% he got free, the rest of the 58.5% he got from milestones like sharing technology and building a small engine plant in the U.S. So... essentially nothing, since he has now in effect merely shared the technology with himself and built a needed engine plant for Fiat/Chrysler as well. He has opened the rest of the world up for Jeep and Chrysler products and opened up the U.S. for Fiat/Lancia/Alfa Etc. He's picked up about 12 Billion dollars worth of Chrysler for around 3 Billion in actual money spent. Brilliant!

The only problem I can see with Chrysler under the leadership of Fiat is problems for profit. Most people or some people do not rust Fait. Their manfactured produtcs are not know for relibility and quality. Plus the Fiat company may want to put some of their product line in the Chrysler products. Immay be wrong in this comment, but a short time will tell.

Fiat basically left the U.S. many years ago, so the U.S.'s ideas of Fiats reliability are outdated. They undoubtedly have improved. That problem is also partly offset by Chryslers ability to sell vehicles here under their own brand. Selling rebadged vehicles made by other automakers is something they have done for many many years.

What I see as Fiats challenge is to extricate themselves from Italy, both from the government as well as the unions there. They have already moved in that direction with the moving of their incorporation to England and changing the stock markets they have their shares available on. The next things are delicate, they must shut down the low performing plants in Italy to readjust their capacity to the marketplace. Exactly the same as Ford and GM have done. The plants there are operated far under capacity which is very, very bad. They may be partially offset by some sales to China, but China make it difficult to sell many vehicles there unless they are made there.